Global Daily – ECB still on track for December

by: Nick Kounis , Maritza Cabezas

Global-Daily-Insight-13-November.pdf (65 KB)
  • Draghi signals ECB is still set to step up stimulus next month
  • He was explicit on deposit rate cut and QE extension but not on increasing size or composition, which is probably still a live issue
  • Fed policymakers reveal ongoing FOMC split






Draghi makes it clear that more stimulus is still on the cards

ECB President Mario Draghi struck a dovish tone in his testimony to the Economic and Monetary Affairs Committee of the European Parliament. Indeed, he poured cold water on any doubts that the ECB would turn back from stepping up monetary stimulus. These doubts had built because of rising Fed rate hike expectations, which have helped to push down the EUR/USD rate. The message was loud and clear: new measures were still on the cards for December.


Draghi talks up lower inflation outlook and downside risks

In the introductory statement, Mr Draghi noted that ‘inflation dynamics have somewhat weakened, mainly due to lower oil prices and the delayed effects of the stronger euro exchange rate seen earlier in the year’. This meant that ‘a sustained normalisation of inflation could take longer than we anticipated in March when we first appraised the overall impact of our measures’. In addition, there were downside risks to the growth picture. The ECB President asserted that ‘the recovery in the euro area is progressing moderately’ but ‘downside risks stemming from global growth and trade are clearly visible’.


Exact package being worked out

Against this background the Governing Council would ‘re-examine the degree of monetary policy accommodation’ at the December meeting. Mr Draghi noted that the Council had always said that QE ‘would run beyond end-September 2016 in case (it did) not see a sustained adjustment in the path of inflation’. In addition, ‘other instruments’ – which we think refers to rate cuts – could also be activated. His explicit remarks on a deposit rate cut and QE extension suggest these steps are very likely. However, he did not signal increasing the size of the QE programme or its composition. We think this is probably still a live issue that has to be discussed and agreed in the Governing Council, but we think ultimately the ECB will decide to increase the scale of the programme and add new assets.


Fed policymakers reveal ongoing FOMC split

On Thursday a number of FOMC members held interventions showing clearly the differences in views on zero interest rate policy. Fed Chicago President Evans, a voting member of the FOMC said that he reiterated his support for delaying liftoff and a very gradual increase in rates. His main concern is low inflation. He sees core PCE at just below 2% at the end of 2018. Evans mentioned that he would favour more aggressive tightening, if inflation rises more quickly than he expects. This is not a surprise since Evans is considered one of the most dovish members of the FOMC. Meanwhile, New York Fed President Dudley, also voting, said the economic conditions needed to justify a rate hike “could soon be satisfied”. This is a bit of a shift since Dudley has been hesitant to commit to a rate hike. Another FOMC member, Richmond Fed President Lacker, who has voted twice for a rate hike this year said that the “recent behaviour of inflation does not warrant such pessimism”, but the credibility of the inflation goal depends on the confidence in the central bank. Finally, the President of the St. Louis Fed, James Bullard, who is not a voting member and a hawk, said that the Fed should raise interest rates since emergency policies are not needed with the labour market and inflation near to the central bank goals. He made reference to another inflation measure, the Dallas Fed’s trimmed mean inflation rate, which is currently running at 1.7%, just below the FOMC’s target.


US job openings gives green light for rate hike

Job openings rose to 5526mn in September up from 5370mn the previous month, according to the US job Openings and Labor Turnover Survey. Service industries continued to drive labour demand. At the same time demand for goods-producing industries which had been subdued, showed that manufacturing hires picked up to the highest level since October 2014. The quits rate was unchanged in September suggesting that the weak job market report in that month did not affect workers who left their job seeking new opportunities. We think that as the labour market slack declines there is more reason for the Fed to hike sooner rather than later. We think that a rate hike in December is likely. The pace of rate hikes, will however be slow, given the concerns raised by the more dovish FOMC members.